Who will be the "Digital Central Bank"? Circle has submitted an application using Arc

Author: David, Deep Tide TechFlow

Translation: @mangojay09, Yujian Web3

On August 12th, the same day as the release of Circle’s first quarterly report after going public, Circle dropped a heavy bomb: @arc, a Layer 1 blockchain built specifically for stablecoin finance.

If you only look at the headlines, you might think this is just another ordinary public chain story.

But when you place it within Circle’s seven-year trajectory, you’ll realize:

This isn’t just a public chain; it’s a declaration of “digital central bank” territory.

Traditionally, central banks have three main functions: issuing currency, managing payment and settlement systems, and setting monetary policy.

Circle is gradually creating a digital replica—first securing “minting rights” with USDC, then building a settlement system with Arc, and next perhaps shaping digital monetary policy.

This isn’t just about a company; it’s about the reallocation of monetary power in the digital age.

Circle’s Central Bank Evolution

In September 2018, when Circle and Coinbase launched USDC together, the stablecoin market was still dominated by Tether.

Circle chose a seemingly “clumsy” path at the time: extreme compliance.

First, it proactively faced the strictest regulatory hurdles, becoming one of the earliest companies to obtain the New York State BitLicense. Known as “the hardest crypto license to get globally,” the application process was so cumbersome that many companies gave up.

Second, it didn’t go it alone but partnered with Coinbase to form the Centre Consortium—sharing regulatory risk and gaining access to Coinbase’s massive user base, allowing USDC to stand on the shoulders of giants from day one.

Third, it pushed transparency to the limit: monthly reserve audits conducted by accounting firms, ensuring 100% backing by cash and short-term US Treasuries, avoiding commercial paper or high-risk assets. This “top student” approach was initially unpopular—during the rapid growth period from 2018 to 2020, USDC was criticized for being “too centralized,” and its growth was slow.

The turning point came in 2020.

The DeFi summer explosion caused a surge in stablecoin demand, and more importantly, hedge funds, market makers, and payment companies started entering the space, revealing USDC’s compliance advantages.

From $1 billion in circulation to $42 billion, and now over $65 billion, USDC’s growth curve has been nearly vertical.

In March 2023, Silicon Valley Bank collapsed. Circle had $3.3 billion in reserves there, causing USDC to briefly depeg to $0.87, and panic spread quickly.

The result of this “stress test”: the U.S. government, for systemic risk control, ultimately guaranteed full deposits for all Silicon Valley Bank customers.

Although not a bailout specifically for Circle, this event made Circle realize that merely being an issuer isn’t enough; it must control more infrastructure to truly own its destiny.

What truly sparked this sense of control was the dissolution of the Centre Alliance. This exposed Circle’s “worker’s dilemma.”

In August 2023, Circle and Coinbase announced the dissolution of the Centre Alliance, with Circle taking full control of USDC. On the surface, this was a move toward independence for Circle; but at a heavy cost—Coinbase gained a 50% share of USDC reserve income.

What does this mean? In 2024, Coinbase earned $910 million from USDC, up 33% year-over-year. Meanwhile, Circle paid over $1 billion in distribution costs, most of which went to Coinbase.

In other words, Circle’s hard-earned USDC profits are now split with Coinbase—like a central bank printing money but handing half of the seigniorage to commercial banks.

Additionally, the rise of Tron has opened new profit avenues for Circle.

In 2024, Tron processed $5.46 trillion in USDT transactions, with over 2 million transfers daily, earning substantial fees just from providing transfer infrastructure—an upstream, more stable profit model than issuing stablecoins.

Especially with the Fed’s rate cut expectations, traditional stablecoin interest income will shrink, while infrastructure fees can maintain relatively stable growth.

This serves as a warning to Circle: whoever controls the infrastructure can keep collecting taxes.

Thus, Circle has begun transforming into an infrastructure builder, deploying multiple initiatives:

• Circle Mint allows enterprise clients to directly mint and redeem USDC;

• CCTP (Cross-Chain Transfer Protocol) enables native USDC transfers across different blockchains;

• Circle APIs offer a comprehensive stablecoin integration solution for enterprises.

By 2024, Circle’s revenue reached $1.68 billion, with a shifting revenue structure—beyond reserve interest, more income now comes from API calls, cross-chain services, and enterprise solutions.

This shift is confirmed in Circle’s latest financial report:

Data shows that in Q2, subscription and service revenue hit $24 million, about 3.6% of total revenue (mainly from USDC reserve interest), but grew 252% year-over-year.

From a single interest-earning business to a diversified “rental” business, the business model gains more control.

The debut of Arc marks this transformation’s highlight.

USDC as native gas doesn’t require holding ETH or other volatile tokens; an institutional-grade quote request system supports 24/7 on-chain settlement; transaction confirmation takes less than a second, with options for balance and transaction privacy to meet compliance.

These features are more like a technological declaration of monetary sovereignty. Arc is open to all developers, but rules are set by Circle.

Thus, from Centre to Arc, Circle has made a three-level leap:

From issuing banknotes via private banks, to monopolizing currency issuance, to controlling the entire financial system—only faster.

And this “digital central bank dream” isn’t unique.

Same Ambitions, Different Paths

By 2025, the stablecoin landscape is dominated by several giants all dreaming of becoming “central banks,” but with different approaches.

Circle chose the most challenging but potentially most valuable path: USDC → Arc blockchain → a complete financial ecosystem.

Circle aims not just to be a stablecoin issuer but to control the entire value chain—from currency issuance to settlement, from payment rails to financial applications.

Arc’s design is full of “central bank thinking”:

First, as a monetary policy tool, USDC as native gas gives Circle a “benchmark rate” style control; second, as a settlement monopoly, built-in institutional RFQ forex engine ensures on-chain FX settlement must go through its mechanism; third, as a rule-maker, Circle retains control over protocol upgrades, deciding which features to deploy and what behaviors are permitted.

The hardest part is ecosystem migration—how to persuade users and developers to leave Ethereum?

Circle’s answer is not migration but supplementation. Arc isn’t meant to replace USDC on Ethereum but to provide solutions for use cases that existing chains can’t meet—such as enterprise payments requiring privacy, real-time FX settlement, or predictable on-chain costs.

It’s a high-stakes gamble. If successful, Circle could become the “Federal Reserve” of digital finance; if it fails, billions of dollars invested might go to waste.

PayPal’s approach is pragmatic and flexible.

In 2023, PYUSD launched on Ethereum, expanded to Solana in 2024, and in 2025, went live on Stellar, recently also covering Arbitrum.

PayPal didn’t build a dedicated chain but instead made PYUSD available across multiple ecosystems, each serving as a distribution channel.

In early stablecoin stages, distribution channels matter more than infrastructure. When you already have a ready-made network, why build from scratch?

Capturing user mindshare and use cases first, infrastructure later—after all, PayPal has 20 million merchants.

Tether, on the other hand, is like the de facto “shadow central bank” of crypto.

It rarely intervenes in USDT’s use; once issued, it’s like cash—market-driven circulation. Especially in regions and use cases with loose regulation and KYC hurdles, USDT becomes the only choice.

Circle founder Paolo Ardoino once said in an interview that USDT mainly serves emerging markets (Latin America, Africa, Southeast Asia), helping local users bypass inefficient financial infrastructure—more like an international stablecoin.

With trading pairs on most exchanges 3–5 times that of USDC, Tether has built a powerful liquidity network effect.

Interestingly, Tether’s attitude toward new chains is passive: it doesn’t actively build but supports others’ development—like backing Plasma and Stable, stablecoin-specific chains. It’s a low-cost bet to maintain presence across ecosystems, seeing which can succeed.

In 2024, Tether’s profits exceeded $10 billion, surpassing many traditional banks; it doesn’t reinvest these profits into its own chain but continues buying Treasuries and Bitcoin.

Tether bets that as long as reserves are sufficient and systemic risks are avoided, inertia will keep USDT dominant in stablecoin circulation.

These three models represent different visions for the future of stablecoins.

PayPal believes in user sovereignty—having 20 million merchants makes technology secondary. That’s the internet mindset.

Tether believes in liquidity—if USDT remains the primary trading currency, everything else is secondary. That’s the exchange mindset.

Circle believes in infrastructure—control of the rails equals control of the future. That’s the central bank mindset.

The reason for these choices may be summed up in Circle CEO Jeremy Allaire’s congressional testimony: “The US dollar is at a crossroads; monetary competition is now a matter of technological competition.”

Circle sees more than just the stablecoin market; it seeks the standard-setting power of the digital dollar. If Arc succeeds, it could become the “Federal Reserve System” of digital dollars. That’s a risky but worthwhile vision.

2026, the Critical Time Window

The window is closing. Regulations are advancing, competition intensifies, and when Circle announced Arc’s mainnet launch in 2026, the crypto community’s first reaction was:

Too slow.

In an industry that champions “rapid iteration,” taking nearly a year from testnet to mainnet seems like a missed opportunity.

But if you understand Circle’s situation, you’ll see that this timing isn’t bad.

On June 17th, the U.S. Senate passed the GENIUS Act—America’s first federal stablecoin regulation framework.

For Circle, this is a long-awaited “validation.” As the most compliant stablecoin issuer, Circle has almost met all the requirements of the GENIUS Act.

By 2026, these regulations will be implemented and the market will have time to adapt. Circle doesn’t want to be the first to take the plunge but also doesn’t want to be too late.

Enterprise clients value certainty, and Arc offers just that—clear regulatory status, predictable technical performance, and a solid business model.

If Arc launches successfully, attracting enough users and liquidity, Circle will establish itself as a leader in stablecoin infrastructure. This could usher in a new era—private companies operating as “central banks” becoming a reality.

If Arc performs poorly or is overtaken by competitors, Circle may need to reconsider its positioning. Ultimately, stablecoin issuers might only remain issuers, not infrastructure leaders.

But regardless of the outcome, Circle’s efforts are pushing the entire industry to confront a fundamental question: in the digital age, who should hold the control over money?

The answer to this question may be revealed early in 2026.